What is an Endowment Plan in Life Insurance?

It is an insurance plan that covers life while also providing a saving component. With an endowment plan, the policyholder enjoys the double benefit: securing the corpus and in parallel, saving for future financial goals. It is a popular plan choice for many people as it provides assured returns, tax savings, and risk protection. This brings peace of mind to the policyholder, as their future savings needs are addressed while also providing financial support against the risk of untimely, unfortunate demise of the policyholder.

Understanding Endowment Plans

An Endowment Plan in life insurance is a policy that provides life insurance coverage along with a savings feature. This means that the policy will provide the policyholder's family with financial protection in event of their unfortunate demise. In addition to that, it will help accumulate savings for the future over the course of the policy term.

In Endowment Plans, the premium has to be paid periodically during the policy term. In case of the unfortunate demise of the policyholder during the active life of the policy, then an Endowment Insurance Policy will pay a death benefit to the beneficiaries named in the policy. When the  policyholder lives through the policy term, and the policy is active until the completion of the policy term, a maturity benefit is paid out to the policyholder as a lumpsum. Thus, in such plans, the financial future is secured in dual manner. 

How Does an Endowment Plan Work?

In Endowment Plans, the policy structure supports predictable savings and reliable risk coverage through a life plan. The regular stream of premiums paid by the policyholder during the policy term, goes partly towards risk coverage or  life coverage and an allocated amount goes towards the savings portion, which is thereafter invested by the insurance company in risk-appropriate investments as permitted by the plan.

The maturity benefit that is paid at the end of the policy term, is funds that the policyholder can use for any financial milestone or goal in his or her life. Typically, many people opt for Endowment Plans towards long term savings for children’s education or their own retirement. So, the available amount at maturity will represent a guaranteed return on that policy term. In case of any untimely termination and unfortunate demise of the policyholder before maturity, an Endowment Insurance Plan pays a death benefit which is either the original sum assured value or the maturity amount, whichever is higher, thereby providing a financial security to the policyholder or their nominees.  

For instance, take the example of a 20-year Endowment Policy where the annual premium is ₹50,000 and sum assured of ₹10,00,000/- . If the policyholder survives the term of the policy, then there is a maturity benefit that includes the sum assured along with the accumulated bonuses. In case of the unfortunate demise of the policyholder during the policy term, there will be a payment of the sum assured of ₹10,00,000/- or accumulated value, whichever is higher, to the policyholder’s named beneficiaries or nominees.

Types of Endowment Plans

There are various types of Endowment Plans, with each type being designed for a different financial goal and level of risk. Knowing all these types is important before the right plan can be chosen: 

With-Profit Endowment Plans

In With-Profit Endowment Policies, bonuses can be added to the sum assured based on the insurer’s yearly profits. These profit bonuses accumulate over the policy term, enhancing the maturity amount for policyholders. Unlike Unit-Linked Plans, these Endowment Policies provide both security and additional benefits, making them a stable choice for long-term financial growth. 

Unit-linked Endowment Plans

The Unit-Linked Endowment Plans are tied to the market performance of the investment component. It may be more rewarding than traditional plans, but the risk factor is relatively higher. The returns can be very high depending on the performance of the underlying assets. These plans are ideal for investors with a moderate to high-risk appetite, as they balance insurance with wealth-building through exposure to equity or debt markets.

Full/Partial Endowment Plans

A full Endowment Plan pays the assured amount at maturity or in case of the policyholder's death. In contrast, a partial Endowment Plan pays a guaranteed basic sum along with extra benefits depending on the performance of the policy. Partial Endowment Plans provide assured coverage with additional returns and are flexible for those seeking a minimum guaranteed return with the possibility of growth.

Key Benefits of Endowment Plans

The following are some of the key benefits associated with an Endowment Plan:

A. Dual Benefit of Insurance and Savings:

Endowments provide many benefits in a bundle. They work as an ideal option to meet most of the varied financial requirements of people. Endowment plans address two major needs-savings and protection. This kind of life insurance covers the policyholders, and additionally the maturity benefit serves as accumulated savings towards major goals. The dual benefit associated with this policy is highly desirable to people who want security from a guaranteed future fund and still do not lose any benefits of life insurance.

B. Guaranteed Returns:

The main attraction of endowment life insurance is the guaranteed maturity benefit. The outcome is financially stable as the policyholder will know exactly how much he or she will gain at the maturity of the policy.

C. Tax Benefits:

The Endowment Plans such as Assured Income Plan, Early Cash Plan and New Shri Life plan provide excellent tax benefits and are one of the most sought-after products among tax-conscious investors. The premiums paid toward the policy are eligible for tax deductions, and in certain conditions, even the maturity amount can be tax-free, thus reducing the overall tax burden.

D. Risk-Free Investment:

Traditional Endowment Plans are low-risk products, and they are well-suited for risk-averse people. Since such plans are not tied to market performance, they provide a secure capital base with predictable returns, which is valuable in uncertain economic situations.

Who Should Consider an Endowment Plan?

Endowment Plans are well-suited for anyone with long-term goals, and wishing to have life insurance with savings. For those seeking to save up to finance their children’s college education or those saving up towards purchase of a dream house or even wanting to build up comfortable wealth before retirement, Endowment Plan is a suitable choice.

However, what you want the money for and how much risk you are willing to take must be established before selecting an Endowment Plan. For instance, if your primary requirement is returns that are assured with no risk at all, then a traditional Endowment Plan will suit the bill. But if more risks for better returns are something you can afford, a Unit-Linked Life Insurance Plan could be a better choice for you.

Factors to Consider Before Buying an Endowment Plan

Here are a few extremely important points that must be considered before you settle on an endowment plan:

• Policy Term: Select a term appropriate to your objectives. 
• Affordability of Premium: Ensure that the premium you have to pay is affordable over the entire duration of the policy payment period and policy term. This can be calculated after making allowance for your current living expenses, commitments and other savings tools. 
• Coverage Amount: Check if the sum assured is adequate to meet your desired level of protection. This should be arrived at using scientific basis factoring in the lifetime value of the policyholder, their income and the needs of their dependents, among other things. 
• Bonus Accrual: For with-profit products, check the bonus re-investment process and the effect of bonuses over the life or term of the policy. 
• Risk Appetite: Choose the type of plan that you think best fits your comfort with the risk level (unit-linked or traditional and within unit-linked the allocation between debt investments and equity investments).

Conclusion

An Endowment Plan is a balanced tool, that covers insurance and savings and is an effective product for those seeking to obtain assured returns in the arena of life insurance. It provides a basic cover with the additional security of a maturity value available at the end of the policy term. Endowment Plans also perform well for policyholders, because its structure is inherently long-term in nature. It is also an assured, secured investment with tax benefits.